Dr. Marvin Wachman (1917-2007) was a great advocate for educating young people. In a distinguished academic career, he served as president of both Temple University and Lincoln University and led the Foreign Policy Research Institute as president from 1983 to 1989. Throughout his life, he remained a passionate believer that “you never stop learning.”
Established in 1990, the Wachman Center is dedicated to improving international and civic literacy for high school teachers and high school students.

21st-Century Maritime Silk Road

Under its Silk Road Economic Belt and the 21st-Century Maritime Silk Road (commonly known as the “One Belt, One Road” initiative) China has sought to build a network of infrastructure projects across Eurasia to encourage trade. At first glance, it seems that all those involved should benefit. Chinese loans would kick start the construction of the infrastructure projects. Developing countries, in which the projects are built, would profit as transshipment points and from the development of new industries that could plug into international supply chains. Revenues from the resultant economic growth would then repay the Chinese loans, with interest.

That all sounds rosy. That is, if the new infrastructure network is used. The mere existence of roads and ports does not ensure that trade will flourish. Certainly economic growth at either end of the network would help. But at the moment the economies of both China and Europe are slowing. Indeed, global economic activity is slowing. If there is not enough trade to make the new infrastructure profitable, then the benefits from the “One Belt, One Road” initiative only flows in one direction: China.

The operative word in the “One Belt, One Road” initiative’s financing is “loans.” Chinese loans may have laxer requirements and carry a lower interest rate than those of commercial banks. But they are loans. China expects them to be repaid. Plus, Chinese loans for infrastructure projects are often made with the understanding that the developing countries award construction contracts to Chinese companies. In short, China benefits from both the financing and construction of infrastructure projects, while developing countries must bear all of the financial risk. When trade is booming, that may not matter much. But when it is not, that should be a concern.

In the past, many developing countries became heavily indebted as a result of infrastructure projects that fizzled. Lenders ultimately had to forgive many of their debts, recognizing that their borrowers could never repay them. China has forgiven some of its loans to developing countries too, about $3.9 billion in all. But that is a small fraction of the total debts that developing countries owe it. For example, in 2015 China cancelled $40 million in debt from Zimbabwe. But Zimbabwe still owes China over $1 billion. Moreover, at the time of China’s modest debt cancellation, Zimbabwe pledged that it would increase its use of the Chinese yuan in its foreign exchange reserves.[1] To outside observers, it seemed that China had used its debt cancellation to achieve its larger foreign policy goals.

Still, several developing counties have welcomed Chinese financing. Sri Lanka’s former President Mahinda Rajapaksa happily accepted Chinese loans to build a new port facility and airport at Hambantota. When completed, the port facility will be the largest of its kind in South Asia. But with slowing seaborne trade, Sri Lanka’s new government has been left with the burden of servicing the country’s $1.1 billion debt to China. Despite the new government’s criticism of Rajapaksa’s acceptance of Chinese loans and the shortcomings of Chinese construction work, it had little choice but to finish the port and airport, lest it default on the country’s loans. Indeed, China may believe that borrowers will be forced to repay their loans, because an outright default would severely curtail any developing country’s future access to credit.

Lately, however, some Asian countries have been playing harder to get with China. That was the case with Indonesia last year. When a Chinese-led consortium sought a contract to build a high-speed railway between Jakarta and Bandung, Indonesia leveraged the consortium’s eagerness to beat a Japanese-led rival to win a major concession: the consortium would drop its requirement for the Indonesian government to backstop China’s loans. The consortium won the contract in the end. But Indonesia offloaded the project’s financial risk onto China.

Thailand has been cautious too. For years, China has talked about the construction of a long-distance, high-speed railway between Kunming and Bangkok. After Thailand’s military coup in 2014, the two countries accelerated their talks over such a railway, as they developed closer ties. But the terms that China offered disappointed Thai leaders. They balked at China’s desired interest rate, its proposed ownership structure, and its request for development rights along the railway’s right of way. So, Thailand shelved the project’s original plan. Instead, it financed its own construction of a much shorter railway from Bangkok to Nakhon Ratchasima, only 250 km away. While China would still supply the technology and oversee procurement, Thailand would use Thai construction companies to build the railway, not Chinese ones.

The two railway cases are telling. China may believe that the thirst for low-interest loans in developing countries should make its “One Belt, One Road” initiative an easy sell. But the leaders of those countries, at least those among them who are observant, know that China’s domestic economy is slowing and that China is increasingly concerned about keeping its construction companies working. They also know what happened in places like Sri Lanka, Indonesia, and Thailand. That knowledge gives them leverage to negotiate better terms from China. If more developing countries do so, China’s “One Belt, One Road” initiative will be quite a bit tougher to realize.

For almost two decades, Chinese strategists have worried about what they regard as the geopolitical encirclement of China. At various times, they have attributed that encirclement to the United States, then India, and most recently Japan.[1] No doubt last week’s large-scale naval exercise in the western Pacific did little to dispel their concerns. For the first time warships from India, Japan, and the United States jointly conducted anti-air and anti-submarine drills in the Philippine Sea, an area directly adjacent to the Chinese-claimed waters of the East and South China Seas.

China’s Encirclement Concerns

Events over the past month likely added to China’s concerns. Last Friday, Indian Prime Minister Narendra Modi visited Bangkok in part to expand his country’s defense and maritime security cooperation with Thailand. A week earlier, he met with President Barack Obama at the White House, highlighting India’s closer ties with the United States. At a summit in late May, the United States and Japan, along with other Group of Seven countries, openly voiced their concern over China’s maritime actions. Days before the summit, Obama flew to Hanoi where he lifted the long-standing U.S. arms embargo against Vietnam, one of China’s South China Sea antagonists. Then after the summit, Japanese Prime Minister Shinzō Abe welcomed a Vietnamese delegation to discuss how they could enhance their military cooperation.

Certainly Chinese concerns over encirclement are not new. During the Cold War, China worried about the Soviet Union pursuing a similar geopolitical strategy. Even earlier, the Chinese Communist Party faced several all too real “encirclement campaigns” during China’s long civil war. Those experiences could have left an imprint may have left their imprint on China’s strategic thinking ever since.

What is clear is that Asia-Pacific countries have begun to prepare for what could be an era of heightened tensions. Such hedging has recently accelerated, as Chinese behavior in the East China Sea, South China Sea, and on its border with India has grown increasingly muscular. The United States has pursued its “pivot” or “rebalance” toward Asia, which shifted the bulk of American naval might to the Pacific. India and Japan have boosted their diplomatic and economic engagement in Southeast Asia and strengthened their military postures. Other countries have begun to do the same. As Australia’s 2016 defense white paper warned, “competing claims for territory and natural resources [in the region]… could undermine stability.”[2] But does such hedging constitute an encirclement of China?

Imagined Encirclements

In the early 2000s, China agonized over a possible American encirclement on its western border as U.S. forces streamed into Afghanistan and Central Asia. But a decade later, a persistent insurgency had worn down the United States and its allies. U.S. military bases in Kyrgyzstan and Uzbekistan were closed; America’s once-close relationship with Pakistan became acrimonious; and U.S. forces began their long withdrawal. China’s concern never materialized.

Now Beijing fears an even wider encirclement by the countries along the Asia-Pacific periphery, as they hedge against China’s assertive behavior. But most of them are still in the early stages of building up their strength. Although Australia has launched an ambitious military modernization program, its forces remain small. India’s defense bureaucracy continues to frustrate its military’s modernization and expansion plans. While Japan fields highly capable forces, its fragile economy constrains its military’s ability to grow. Even America’s “pivot” toward Asia may not be as weighty as it sounds, as the Obama administration has trimmed the overall size of the U.S. Navy. Hence, one could argue that China’s concern over an encirclement is, at least for the moment, not wholly warranted.

Undermine the Encirclement

Besides, the countries that China fears will encircle it are not yet a cohesive bunch. Officially non-aligned, India remains skittish about is relationship with the United States. And while Australia and Japan have security treaties with the United States, they do not have strong ties with each other. That was evident when Australia, at the last minute, chose to purchase France’s Scorpene-class submarine over Japan’s Sōryū-class submarine for its next-generation submarine fleet. India’s security relationships with Australia and Japan are equally tenuous. China could use bilateral deals to weaken those relationships and hinder a nascent encirclement from coalescing any further.

Breakout of the Encirclement

But even if China’s fear was to manifest itself, Beijing is already developing the means to break out of it. In late 2013, China turned heads across Asia with its “One Belt, One Road” initiative. Among the many infrastructure projects it has financed in Southeast Asia are a special economic zone in Cambodia, hydroelectric dams in Laos, and energy and railway projects in Malaysia. While China’s “yuan diplomacy” has not always been successful, it has had an impact. Cambodia and Laos have become reliable advocates for China within ASEAN. Malaysia largely remains on the sidelines of the South China Sea dispute, despite a rising number of Chinese infringements of its exclusive economic zone. China’s initiative may prove useful even in the Philippines, which has been a thorn in Beijing’s side. The Philippines’ new president, Rodridgo Duterte, has indicated that he would undertake the bilateral dialogue that China has long sought in exchange for Chinese economic development assistance.

Benefit of the Encirclement

Still, Beijing may have reason to play up its fears of encirclement. Despite its remarkable economic achievements, China faces a host of problems. Today, Chinese leaders must manage their country’s difficult transition from investment-led growth to expansion by private consumption, while dealing with its various debt-fueled bubbles. Even under the best conditions, those challenges are bound to be volatile. So some may see fears of encirclement as a way to rally public sentiment and maintain the “social stability” needed to ensure the longevity of communist rule. In any case, whether the “encirclement of China” is imagined or real, effective or not, one can expect the phrase to remain in Beijing’s lexicon for years to come.

During visits to Central and Southeast Asia in 2013, Chinese President Xi Jinping unveiled Beijing’s aspiration to create what it called the Silk Road Economic Belt and the 21st-Century Maritime Silk Road. Both would entail the construction of new infrastructure to better connect the present-day countries along what was once the ancient Silk Road between China and Europe. The former would do so over land with roads, railways, and airports; the latter across the ocean with seaports. China’s two-part aspiration is now commonly referred to as its “One Belt, One Road” initiative.

At the time of Xi’s unveiling, China was near the zenith of its economic power. Not even the 2008 global financial crisis seemed able to derail China’s economic ascent. Some saw the “One Belt, One Road” initiative as a way for China to extend not only its economic, but also its political reach across Eurasia. India had begun to worry about what it considered to be China’s “string of pearls,” a series of Chinese-built seaports across the Indian Ocean. Others viewed the initiative even more broadly as an ambitious effort to reorient global commerce towards China.

But since then the air of invincibility surrounding China’s economy has dissipated. China’s engines of growth—export manufacturing and infrastructure construction—have sputtered, as the debt that fueled them and the overcapacity that they created have ballooned. Over the last year and half, Chinese leaders have been forced to repeatedly “fine tune” their economy to keep it growing. They boosted China’s government spending, devalued its currency, cut its interest rates six times, lowered its bank reserve ratio seven times, and even directly intervened in its stock market. Still, China’s economy continues to slow.

That slowdown has spurred Chinese leaders to seriously begin to shift their export and infrastructure-led economy to one that is driven by consumers. How successful that transition will be is uncertain. But one thing is clear, the “social stability” so prized by the Chinese Communist Party has begun to fray. Popular unrest is on the rise. The number of labor protests in China has soared from about 100 in 2010 to almost 2,500 in 2015.[1]

Thus, Beijing has every incentive to keep its giant manufacturing and infrastructure-construction state-owned enterprises (SOE) humming, as its economy makes the transition. Seen in that light, China’s “One Belt, One Road” initiative looks less like a well-planned strategy and more like a scramble to keep the order books of its SOEs full. New infrastructure contracts abroad would help do that; and once built that new infrastructure might help Chinese manufacturers export at a lower cost.

One can see China’s push to build more infrastructure projects from Indonesia to Pakistan. In September, a Chinese-led consortium won approval from Indonesia to build a $5.5-billion high-speed railway in Jakarta. But the consortium won only after it agreed that the Indonesian government would not have to guarantee the Chinese loans needed to finance the railway’s construction. While that concession may have secured the approval, it also increased the potential financial losses that the consortium would have to bear if anything goes wrong. With such large and complex construction projects, it is hard to ensure that will not happen.

Surely, China expected a different outcome after its construction companies built a port at Gwadar for Pakistan in 2007. Despite a total investment of over $1 billion, the port has remained virtually idle. Now China is doubling down on the Gwadar project. It has promised $45.7 billion in fresh financing to build the China-Pakistan Economic Corridor, a series of energy, road, railway, and pipeline projects that will more closely tie Gwadar to China.

Of course, China can still benefit from such infrastructure projects even if they turn out to be unprofitable. The new road, rail, and pipeline routes through Pakistan will enable China to import strategic resources, like oil, natural gas, and minerals, from the Middle East without being reliant on sea routes through the Indian Ocean. The projects could also deepen China’s “all-weather” friendship with Pakistan by creating new constituencies within Pakistan that benefit from the economic activity that the trade routes to China could foster.

Other land-based links to China could do the same. The Kunming-to-Bangkok railway is another example. The portion of it in China is already finished; the portion in Laos broke ground in December; and the final portion in Thailand is slated to begin construction in May 2016. Given the massive scale of Chinese trade, even if a small portion of it is redirected over the railway, it could reshape the economic interests of a small country like Laos. Indeed, China may hope to use the railway to pry Laos away from its traditional ally, Vietnam, and gain another friend in ASEAN. On the other hand, China would not benefit to the same degree from Chinese-built seaports and airports that are not directly connected to it. While they may boost trade in the host country, the course of that trade could be redirected elsewhere, if trade with China does not evolve as expected.

That is now a real possibility. If the Chinese economy continues to soften, it means that China will need to import fewer raw materials and export fewer finished goods. In the second half of 2015 China’s monthly imports fell 10 to 20 percent from a year earlier; and its exports slipped too. Unless global demand revives or Chinese consumers pick up the slack, Beijing might well expect its “One Belt, One Road” initiative to yield more long-lasting political than economic benefits.

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